Via Macquarie:
Last week we hosted BP’s Chief Economist, Spencer Dale, to hear the oil major’s latest views on the likely trajectory of global energy markets. A key industry reference point, the Global Energy Outlook 2035, is a deep dive into future energy scenarios and has major implications for renewables and climate change analysis. For more information on the long-term projections from the session see page 1. Key takeaways from an ESG perspective are outlined below:
In an upgrade cycle: This is the sixth year in a row BP has materially upgraded its renewables growth forecast, this year from 6.6% p.a. to 7.6% p.a. after a record year for renewables. Growth is non-linear with 2015/16 seeing the highest new additions of installed capacity, and total capacity has now overtaken coal (Source: IEA). The IEA is also in an upgrade cycle on renewables, recently upgrading its growth forecast by 13% from 2015. Supply side: A major driver of the upgrade cycle is the cost curve for solar, with utility-scale generation costs forecast to drop by another 25% over 2015- 21 (Source: IEA). Of note, BP’s starting point on solar $/MWh is high, even against cautious IEA numbers. For example, BP has a USD/MWh range of 70-140 in 2015 reducing to 60–100 by 2035 in China, whereas the US is already at this level of cost efficiency today. The IEA notes that recently installed capacity achieved (long term) prices from 30 to 50 USD/MWh in the US. Using the most recent USD/MWh numbers and applying Moore’s law of efficiency gains over the period, Carbon Tracker sees solar supplying 29% of global power generation in 2050, phasing out coal entirely vs industry BAU scenarios of c.11% by 2050.
Demand side: Another point of contention is disruption from changes in mobility. BP’s base case has electric vehicles (EVs) penetrating only 6% of the global fleet by 2035, which translates to a reduction of 1.2Mb/d vs. current total demand of ~100Mb/d. Fuel efficiency improvements provide a more material reduction of 17Mb/d by 2035. Under its ‘Even Faster Transition Pathway’, the ‘Mobility revolution’ (see Fig. 3) drives a bigger change in fuel mix to 40% non-fossil and Co2 emissions at 32% below 2015 levels by 2035 (meeting the IEA450 scenario). Using updated cost reduction projections for EVs, Carbon Tracker finds a global fleet penetration of 35% by 2035. This growth trajectory sees EVs displace approximately 2Mb/d in 2025 and 25 Mb/d in 2050.
Viability of global coal: This shows that the long term viability of coal can turn on a head depending on whether cautious or bullish on the cost curve for EVs or solar. What is increasingly clear, at least on a global basis, is that coal viability will be inversely related to incremental improvements in solar and wind, on the supply side, and by mobility disruption from EVs, autonomous cars and ride sharing/pooling, on the demand side. Further sensitivity analysis is required to see how this might play out across sectors, particularly in relation to mobility disruption. Contact the team for further information or requests on these themes.
